Turbulent Times in the International Art Market

July 22, 2016

Asia’s high saving rate is thought to be one of the reasons behind spiralling prices in the international art market.

Key pieces by significant artists have been achieving astonishing figures when they reach auction- just this month, several records were broken in a single auction at Sotherbys: a Picasso sold for a record sum and a lithograph of Munch’s The Scream became the most expensive impression of one of the original paintings to ever be sold. In fact, the art market has been experiencing a significant upwards trend since 2005.

Art may be a turbulent and unregulated vehicle for investment but Asia’s high savings rates mean there’s a global lack of places to park that money.

Some investors are gambling with part of their portfolio by buying into so-called ‘alternative asset classes’, including art, gold, watches, wine, and real estate, on the gamble that these rare and coveted items may inflate in value over time. This leads to record prices in the auction house but there is also a risk that the bubble will eventually burst.

The same forces that are boosting the art market to record highs have also contributed to London’s stratospheric property prices. A lack of safe investment vehicles means the world’s savers need to find less conventional parking spaces for their international funds.

But just as the property market has seen bubbles burst in the past, the art world has also experienced sudden crashes. The art world last experienced significant contractions in around 1990 and 2008/9.

These bubbles are defined as a dramatic escalation of trade volume at prices that exceed fundamental value, which is often then followed by sudden collapse, when the bubble is said to have burst. Some commentators believe the latest bubble is due to burst soon.

The recent record-breaking Sotherby’s sale is thought to be a signal of this: pre-sale estimates were surpassed by tens of millions of dollars. This indicates the market isn’t successfully or rationally judging the value of these items, which can often indicate a crash is imminent.

Strange sales

Look more closely at the patterns of sales and you’ll see odd trends emerge. For a start, the market is decidedly top-heavy: 57% of all auction sales last year came from works selling at more than $1 million and 28% of sales came from works selling at over $10m.

Art fever seems to be mostly focused on 19th and 20th century artists – these include names such as Pablo Picasso, Lucien Freud, Mark Rothko, and the impressionists. Sales of major paintings from a fairly narrow set of big name artists in this category accounts for the vast bulk of money spent on art globally.

A different pattern is being seen with groups of contemporary artists such as the YBAs (Young British Artists, generally understood to mean those who started exhibiting after the late eighties, including names such as Damien Hirst and Tracey Emin), and so-called ‘zombie formalism’ painters such as Jacob Kassay, Lucien Smith and Parker Ito.

Until recently these particular groups of artists were the subject of market speculation, with works being sold for large sums at auction. Now these works are instead being sold in private sales for undisclosed sums.

It’s likely that these works are no longer reaching the high prices they originally paid for them. Owners obviously don’t want to promote this fact, as it will reduce the value of similar works they hold, so they are exchanging works via private sale for undisclosed sums. It’s a legal way to be discreet about the value of the assets in order to preserve what value they have left.

There are also rumours of skulduggery around the inflated prices for major works by popular artists that are still the subject of market speculation. Selling a major work for a high sum invariably means that other minor works by the same artist will also increase in value. This means that a collector who owns multiple pieces by the same artist has an incentive to inflate the price of any of that artist’s works when they go to sale.

This applies even if they don’t themselves own the piece that’s on sale. High net worth collectors can inflate the piece of an artwork they don’t own by acting as a guarantor for the auction.

If the artwork doesn’t meet its reserve price at auction, the guarantor gets a relative bargain when they acquire the work at the guaranteed price. If it sells at a higher price, the collector gets a fee anyway. This is all perfectly legal and good practice for the auction house concerned, yet it serves to inflate prices across the industry.

Changes ahead for the art world

Art market analysts seem to believe the market will need to correct itself soon – in other words, the bubble is ready to burst. There are also other forces likely to impact the global trade in artworks.

The Brexit is likely to change the import/export tariffs for this major art trade hub and it’s unclear how a European directive known as the ARR will be impacted (Artist’s Resale Right, essentially a royalty paid to an artist when their artwork is resold by its buyer).

Britain is a major hub in the art dealing world so a Brexit is unlikely to be without impact on the global trade. In fact, the English language is so significant to the art world that Christies even offers an English language course specifically targeted at non-English speaking students of art-related topics.

With all these development it’s unlikely that things will stay the same over the next 2-5 years.

Whilst the art world has weathered many storms, including previous bursting bubbles, the art world is facing a turbulent few years with much uncertainty. The economic slowdown in China and Russia’s economic problems are also dampening the fever of the art market. JJ Charlesworth, Associate Editor at ArtReview magazine, wrote “The art market reflects the fact that the world is getting richer—it’s economic growth, in India, in China and elsewhere, that makes the super-rich rich, after all.”

It’s this prevailing trend that may keep the art trade thriving over the medium to long term.